China announces new stimulus
Sep 13, 2012
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China announced that it will spend ¥1trn ($160bn), or 2% of GDP, on infrastructure over the next few years. It has approved 25 urban rail and 13 highway construction projects, along with some water schemes.
The move came as yet more disappointing data confirmed that the economy is rapidly losing steam. Exports in August were up just 2.7% on the previous year, while imports fell by 2.6%. Industrial production grew at its weakest rate since May 2009. Fixed asset investment grew at the slowest pace in ten years during the first eight months of 2012.
What the commentators said
“Hands up if you thought China was serious” about rebalancing its economy away from investment and towards consumption, said Lex in the Financial Times. That long-term goal is evidently being subordinated to the urgent need to boost growth right now. But this stimulus, unlike the huge 2009 effort, may be no more than a “wish list”. Today, big spending announcements “will not translate into guaranteed growth”.
For starters, there is less to this stimulus than meets the eye, according to Wang Tao at UBS. Most of these projects aren’t new, but are already in local governments’ plans. It will also be much harder to bolster growth this time. Banks will be reluctant to lend, given that bad loans are piling up from the last spree. And there will be little demand for any money they do make available, as “consumers, businesses and debt-burdened local governments across the country are showing little interest in spending”, said Keith Bradsher in The New York Times.
Not only is the private sector busy repairing its balance sheet, but it “cannot find areas to make enough profit to justify its investment”, said Dong Tao of Credit Suisse. A key problem is overcapacity in various industries as demand dwindles and inventory piles up. Finished steel products grew at an annual rate of 60% in July.
As doubts over the leadership’s ability to control China’s bursting housing and credit bubbles spread, it hardly helps that China’s leader-in-waiting, Xi Jinping, has gone missing, said Tim Wallace in City AM. Just as the economy is heading for a hard landing, political uncertainty surrounding the handover to a new group of leaders next month is being added to the mix. No wonder Chinese stocks have hit a three-year low.
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